Over 2017 particularly but into the first months of this year, Japanese equities were very much in vogue with professional and institutional investors. Many of the most respected investment analysts and money managers were waxing lyrical over the value that could be found in Japan following a couple of decades over which the country’s equities were considered pricey on earnings multiples and dividend yields.
Many of those investing online in stocks and shares ISAs and SIPPs may have followed the advice of an avalanche of advice pointing towards Japan. But are Japanese equities still an attractive proposition? Multiples are currently similar to those of U.S. equities. This means they are high but down on the crazy valuations of previous years. Dividends are also rising and seem to show plenty of room for further improvement with still the lowest dividend ratio among developed markets.
Japanese companies, on average, also have very strong balance sheets with more than 50% currently holding more cash than they do debt. Japanese small caps are also attracting interest on the basis of their net financial value to market capitalisation ratios. Net financial value is the sum of cash in the bank plus investment minus debts. For more than 34% of Japanese small caps this ratio sits at more than 30% and as high as 50% or more for just under 20%.
The relative attractiveness of Japanese equities at present has seen international capital flow into Tokyo, pushing valuations up by around 6% over the last year. While that figure was 20% in the USA, it is considerably better than the flat performance of equities in Europe and other Asian markets.
The increase in the popularity of Japanese equities also means that those investing online have more choice available to them than ever before when it comes to funds focused on the market. Established Japan-centric funds from investment managers such as Baillie Gifford, JPMorgan and Fidelity focusing on large caps or quickly growing mid and small caps have been joined by new competition. There are also now a number of small, unlisted funds sifting through the smaller Japanese companies on which there is very little independent analysis, which has meant in the past they have been overlooked by international investors. One, the Japan Value Fund, managed by Jan Pstrokonski has returned 26% a year compound return since its launch 3 years ago in October 2015. That’s impressive even within the context of admittedly favourable market momentum.
Another favourable factor in favour of Japanese equities is the rise of activist investors. Japanese boards have, in the past, not been overly driven in the face of a languishing share price but the combination of activist investors rising in influence and a government drive to improve corporate governance standards and transparency means that is now changing and more pressure is being brought to bear. Japanese companies have also significantly deleveraged over recent years which could make their stocks a safe haven if a global recession hits in coming years as many analysts expect to happen.
China is also likely to provide aggressive stimulus to reignite its economy in the face of a recession. That’s an option Western governments no longer have after largely exhausting their arsenals over the last decade. That could have a knock-on positive effect for Japan with the caveat that currency risk impacting on gains could become a factor depending upon how the yen reacts.
However, all-in-all, Japan should still be of interest for investors. It doesn’t look as though it’s too late.